Berlin The European Central Bank (ECB) has initiated interest rate hikes to stop inflation. However, with a view to the I index, this will not be an easy task. Despite the announcement by those responsible at the ECB in recent weeks that they want to do everything they can to combat inflation, the early warning system of Handelsblatt and TU Dortmund is predicting that the situation will worsen.
The I index reached a value of 16 percent in June. This means that the topic of inflation played a role in more than every sixth published newspaper article. This means that it has risen by almost three percentage points compared to the previous month. A year ago, the index was still five percent.
The development is a clear sign that the recent slowdown in inflation in Germany is only a temporary phenomenon. The inflation rate was 7.6 percent in June, after 7.9 percent in May.
The I-Index also examines which themes are increasingly influencing inflation. In June, it became apparent that commodity prices were reported less than before. So far, inflation has been primarily driven by rising energy prices. The development in the I-Index now indicates that people are breaking away from this description of the problem.
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Instead, the cause of inflation is being sought elsewhere: currently primarily in monetary policy. 17 percent of the articles dealing with inflation dealt specifically with the central banks. This is a top value – by far. The record so far was 14 percent.
For project manager Henrik Müller from the TU Dortmund, this makes it clear that the ECB needs to communicate better. “President Christine Lagarde should concentrate her public statements exclusively on fighting inflation and publicly back off on other distracting issues such as climate change,” says Müller. Otherwise, the ECB would lose valuable time to contain rising inflation expectations.
Inflation expectations are significantly influenced by the media
The I-Index feeds on detailed insights into consumer and business expectations and can thus act as an early warning system. These inflation expectations are crucial to the question of whether inflationary events will pass or continue.
When consumers and businesses adjust to long-term price increases and adjust their behavior accordingly, inflation becomes entrenched. These expectations are significantly influenced by the media. The “Dortmund Center for data-based Media Analysis” (DoCMA) at the Technical University of Dortmund has therefore developed the I-Index and published it for the first time in March 2022.
The methodology of the I-Index
Due to the uncertainties regarding the further development of inflation, the joint idea of Handelsblatt and scientists from the Technical University (TU) Dortmund came up in November 2021 to use the informative value of media reporting.
The project was implemented by the “Dortmund Center for data-based Media Analysis” (DoCMA), which is based at the TU and is a collaborative project of communication scientists, economists and statisticians. There the model was baptized “Inflation Perception Indicator” (IPI, Inflation Perception Indicator), for the sake of simplicity it is also called the I-Index.
The I-Index project is headed by Henrik Müller, Professor of Economic Journalism. The researchers Tobias Schmidt, Jonas Rieger, Lena Marie Hufnagel and Nico Hornig are also involved. Over the months, the project was also accompanied by TU econometrician Carsten Jentsch and Torsten Schmidt, head of economic activity at the Leibniz Institute for Economic Research (RWI) in Essen.
The index is based on a model that brings together communication sciences and economics with the help of IT-supported processes. The methodological basis is provided by so-called “topic models”, which help to make content patterns in large amounts of text visible. The Dortmund researchers have developed a method that enables them to calculate time series using a dynamic topic model.
The results also make it possible to identify causal relationships in the reporting. From these, “narratives” can be derived that determine expectations of consumers and companies when it comes to inflation.
The concept of narrative can unearth novel insights into current inflation dynamics, as it places available data on price expectations in a context of content. Which causes of inflation are addressed and who is to blame for rising prices all play a role in the formation of inflation expectations, but have so far been an aspect that has been underexposed in research.
The I-Index is based on around 2.9 million newspaper articles that appeared between January 1, 2001 and February 28, 2022. They come from the “Süddeutsche Zeitung”, the “Welt” and the Handelsblatt.
“The ‘Süddeutsche’ is center-left in the economic policy discourse, the ‘Welt’ center-right, and the Handelsblatt reflects the specific economic reporting,” says project manager Müller. Thus, the average of the published opinion can be mapped with the I-Index. “In this way, we avoid the risk of the results being falsified by loudly expressed extreme positions, which undoubtedly exist when it comes to the emotional issue of inflation.”
Articles dealing with the topic of inflation were extracted from the entire articles. A little more than 50,000 items went into the detailed analysis.
It is based on the analysis of around three million newspaper articles. In addition to searching for the term “inflation,” algorithms filter for related terms, making associations and forming categories that can inform inflation views and influence expectations.
In fact, according to a Bundesbank survey, inflation expectations have continued to rise. Private households are therefore expecting inflation of eight percent over the next twelve months. In January they had still expected 4.5 percent. The expected value for the next four years is five percent, one percentage point higher than at the beginning of the year.
However, it is interesting to note that expectations have not risen as quickly since April. There can be two reasons for this: Either the attempts at improvement by monetary policy are working and the economic weakness is being linked to hopes of falling prices.
Or the households do not keep themselves constantly informed about the current economic situation, but sometimes more, sometimes less.
A look at the details of the I-Index shows that the second reason could be decisive at the moment. The researchers at the TU Dortmund state in their latest analysis: “The presentation of the media content in the I index indicates a longer phase of inflation.” Germany could face a “galloping inflation”.
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